Whether you have a lot or a little bit of debt, chances are you might be worrying about how to repay it. Although a life without debt might be your goal, ultimately you should worry more about how you’ll repay your debt or keep up with the payments if you lose your job, can’t work or die. For people with this concern, payment protection insurance (PPI) could be the answer.
PPI works like this: A person purchases a PPI policy, and hopes to never use it. If the worst should happen, a person makes a claim to their insurance company asking that the insurance company take over the debt payments.
Despite what you bank or lender might say, consumers have a choice of insurance company and PPI policy. In the UK, there are hundreds of insurance companies like Canary Claims which allow customers to get PPI policies at a fraction of the cost of what lenders charge. If you’re still unsure about what PPI is, or how to get it, or why your lender might not be the best place to buy it, read on!
Depending on the type of insurance purchased and the reason a person is making a claim, these debt payments could either be for a limited duration of time, or indefinitely. Also dependent on the type of insurance purchased is the amount of debt repayment. For debts like mortgages and loans, the insurance company will repay the monthly debt payment. For debts like credit cards, the insurance company will repay the minimum monthly payment.
In many cases, people don’t know whether or not they have PPI. Most lenders require debtors to have PPI, or automatically include it as part of the lending process. In the UK for example, it’s reported that more than 20 million people have PPI and 40% of these people are not aware that they have a policy.
The cost of PPI varies based on the type of loan and the amount borrowed. For fixed loans with built-in PPI, a percentage of the amount borrowed (15-50%, depending on the policymaker) is added to the total sum borrowed. This means that, right from the first day, the amount of the loan and the PPI premiums are subject to the loan’s interest rate.
For revolving loans (like lines of credit and credit cards), the premiums are a small percentage of the balance, added onto the monthly bill. With a monthly balance of £1000, a person might have between £75 and £100 added onto his statement for the month.
Back in 2008, Egg was fined £720,000 for having misled its customers into purchasing Egg PPI. The Financial Services Authority determined that Egg had misled customers for two years and pushed them into purchasing PPI policies that were useless in their particular case.
Similarly, in 2011, a Barclays PPI claim scandal broke. In response, Barclays implemented a “no questions asked” refund policy. Still today, customers hoping for a refund must apply on Barclays’ website.
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